Joseph Cacciapaglia

In an earlier post I mentioned several types of businesses that make good sale/lease-back transactions. Since then I've been asked why a business would want to take part in this type of transaction. In a sale/lease-back a owner occupant of a building sells the property and then signs a lease with the new owner to stay in the space. Often a business will do this as a way to unlock the equity that they have in their property. For example, there are several small businesses in Reading, PA that own their own property. These businesses range from retail store owners to small businesses that own the office buildings where they are located.

From time to time many small businesses run into cash flow problems. It is common to have a profitable business that for one reason or another does not have the cash or credit to meet its current liabilities. During good times, it was often possible for small business owners to refinance their properties and take cash out. In today's credit market's this is much less likely. In general, lenders have reduced the LTV that they are willing to lend, and the value of many of these properties has decreased. Business owners may still have equity in their properties, but they are unable to access it with a refinance. By selling the property, they are able to access 100% of their equity.

Many businesses rely on their location for repeat business, and are therefore reluctant to sell their properties just to access their equity. By leasing the property back, they are able to keep their location and still get the much needed cash from the sale of their property. This is why a sale/lease-back is often a good option for property owners in need of cash for their business. Do you have equity in a property in Reading, PA that you would like to unlock?

It's been a little while since I added to my series on evaluating commercial real estate investments. If you recall, we were analyzing a small retail property in downtown Reading, PA. We looked at several aspects of the property's performance, from NOI through IRR, but one thing that we did not look at was the quality of the tenant. There are several things to consider when looking at a potential tenant, but today I am just going to cover two important ratios that you should look at when evaluating the balance sheet of a potential tenant.

The first ratio I always like to look at is the Current Ratio. This is a measure of how well a company is positioned to handle its short term cash needs. The Current Ratio is calculated by dividing the company's current assets by its current liabilities.

Current Ratio:

It is essential that this number is greater than 1, and the larger it is the better off you are. So does that mean as long as our small retail tenant that we're considering has a Current Ratio of 2 that we are safe? Not necessarily. One portion of a company's current assets can be made up of inventory. Sometimes companies that have excess inventory have strong Current Ratios, but are still unable to pay their current liabilities. For example, if a company has $2 in cash, $8 worth of inventory and owes the bank a payment of $6, they are only able to pay the bank if they are able to sell half of their inventory immediately.

For this reason, I also like to take a look at a company's Quick Ratio. To calculate your Quick Ratio, you first subtract your inventories from your current assets, and then divide the difference by your current liabilities.

Quick Ratio:

Determining the financial strength of your potential tenants is one of the easiest ways to mitigate the risk of purchasing commercial real estate. If you are interested in purchasing a retail property in Reading, PA, and you'd like help evaluating your potential tenants, give me a call today.

Like most commercial real estate, value is created in retail properties through effective leasing. One important aspect to consider when leasing your retail real estate is your tenant mix. In other words, you need to consider how your tenants businesses relate to one another. Here are five questions to ask your self when evaluating a new tenant for your retail property in Reading, PA:

Does the new tenant compete with your existing tenants? For most types of retail properties, it is not a good idea to lease vacant spaces to tenants that directly compete with your existing tenants. This is pretty obvious, but it is not always the rule. There are some businesses that benefit by locating close to their competitors. These are usually companies that sell big ticket items that people want to shop and compare. This is why you often see several car dealerships located in clusters.

What's your prospective tenants target market? It's important to consider the type of customer that will be coming into your retail center. Do most of your stores cater to high end shoppers or bargain hunters. Does your center attract a specific demographic group? Will your center's existing customers shop at the new tenant's establishment?

What is the peak traffic time for your new tenant? Some stores will get more traffic in the morning or the middle of the day, and some will attract a night-time crowd. If parking is limited in your center, it's best to have a mix. That way the parking lot is never too crowded at any given time.

Does the prospective tenant attract it's own customers, or does it require traffic from an anchor tenant? Many smaller retailers will not attract enough customers on their own, and will only survive in a location that already has a strong customer base.

Will the new tenant encourage shoppers to stay in the center longer, or will they be in and out quickly? It's important to consider whether your center is geared towards creating a shopping experience or just a quick convenience stop. Some tenants will pay a premium to rent space where people stay and shop longer. Length of stay may also be an important consideration when parking is limited.

Creating the right mix of tenants is more of an art than a science. The more deliberate you are in planning your tenant mix, the better chance you have of turning your real estate investment into a thriving shopping center. What other things do you consider when evaluating how a prospective tenant fits into your property?

If you are a serious commercial real estate investor sooner of later you are going to find yourself owning a property that is difficult to lease. Tenant's preferences change and what may have been attractive space a few years ago can quickly become obsolete. This problem is multiplied when the property is particularly large. Leasing to Micro-Tenants is one strategy that I've seen used to fill large hard to lease spaces. This strategy has been used in retail, office, industrial, and even multifamily and hotel properties.

Retail: Often when big box retailers move out of a space it can be extremely difficult to rent. These properties can be rented to Micro-Tenants in a few different ways. One way is to turn them into indoor flea markets and rent tables or booths. Sometimes this is even done on a daily or weekly basis.

Office: I had one client who made his living by purchasing office properties with large vacancies and converting them to executive suites. This strategy not only allowed him to fill buildings quickly, but he also was able to achieve above market lease rates on a per square foot basis.

Industrial: The first self storage properties were created from old warehouses and vacant industrial buildings. Today self storage has become an asset class of it's own, and most people don't even realize that it is just a Micro-Tenant strategy that has stuck.

Multifamily: Anytime you have a multifamily property that is rented by the room instead of by the unit, you essentially have Micro-Tenants. This leasing strategy has become the norm in many student housing complexes. It has also been employed for years in boarding houses and bed-and-breakfasts.

Hotels: I know that this one might not seem possible. Hotels were already rented by the room, so how can you get any smaller? Well for this one I just have to show you.

This travel blogphoto's source is TravelPod page: Let's go Tokyo!

The one downside to this strategy is that it is much more management intensive. Instead of signing a new lease every 5 years, you might be signing a new lease everyday. I once managed a 875 unit self storage facility, in which it was common to sign 2-3 new leases in a day. In case you're wondering, this property had previously been a large industrial property that had been converted to this Micro-Tenant use. Here in Reading, PA there are several opportunities to convert large vacant spaces to accommodate Micro-Tenants. Have you considered this option for your vacant space?

I had an interesting meeting this weekend with a commercial real estate investor in Reading, PA. This investor has several projects in different stages of development throughout the city. He asked me to sit down and discuss his overall portfolio and help him figure out if and how I can help him. Although this was only the second time I've met with this individual, he was very open about his situation and was willing to discuss several different options for each of his properties. After our meeting I walked away thinking that we had covered a lot of ground, and I wondered what it was that made it such a productive meeting.

It took me a little while, but I realized that the answer was trust. This investor was willing to trust me, a relative stranger, with a lot of information about his situation. I've met several investors who play their cards very close to their chests. Some would never dream of telling me about their other properties until I got the first one sold. By sharing a lot of information, this investor allowed me to get a very good understanding of his motivation, needs, and wants. Each of his properties is unique, and by discussing all of them, I am in a better position to offer my advice about what will most benefit him.

Like most investors, he is interested in maximizing his return on investment. Once I fully understood his situation, it became clear that I could help him most by leasing some of his properties, but selling others. I think that some investors are worried that if they tell me about their whole portfolio, I'll somehow talk them into selling everything. Maybe they're worried that I'll tell all of their secrets to my friends. I'm not sure. What I do know is that by keeping information from me, they are making it more difficult to give the best advice for their unique situation.

It's important to choose a real estate professional that you trust, and are willing to share information with. That is the only way you will get the full benefit of their knowledge and experience. A mediocre agent will full information will outperform an incredible agent with a limited understanding of your situation. How much information do you share with your agent?